Equities continued to recover yesterday as treasury yields continued to trade lower but unfortunately, so far at least, this didn’t drag GBP higher as final manufacturing PMIs for October came in lower than expected, and showed the sector contracted further. The EUR weakened also continuing on from yesterday's moves lower. USD data was very mixed yesterday, with ADP payrolls coming in lower, S&P manufacturing PMIs coming in the same as before, but the ISM number came in lower. Also, the JOLTS job openings came in better, reporting 9,553,000 job openings in September versus a forecast of 9,400,000. Overall USD gained over the afternoon.
The Fed, as expected, elected to hold rates, but signalled it's policy tightening cycle may be over with Jerome Powell downplaying the dot plot that suggested another 0.25% rate hike before the end of the year. Treasury yields declined as a result, with 10 year's now down 20 bps since the start of trading yesterday, dragging USD weaker with it - equities rallied late into the night, and futures pricing indicate stocks will open higher indicating higher risk appetite.
* Daily move - against G10 rates at 7:30am, 02.11.23
** Indicative rates - interbank rates at 7:30am, 02.11.23
We said yesterday that equity markets, and thus risk appetite, tends to be higher in November, and last night's Fed meeting could well be the catalyst to continue this mood in markets. Should treasury yields stabilise and/or continue to decline then likely to see some USD weakness. As mentioned before should we see higher risk appetite, then GBP could well ride on these coat tails, which moves us nicely on to the BoE meeting today. Rates are expected to remain at 5.25%, and so long as we don’t get any dovish notes in the commentary then the meeting could well provide a catalyst for GBP strength across this month.
Money market expectations for a rate hike have been diminishing steadily since July with the BoE communicating rate pauses. To no surprise, the pound has been dropping steadily as well, and it seems that going into the year-end there will be little to support the currency. We expect the BoE to hold rates in this meeting, as well as highlighting that inflation and economic growth remains a concern.
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